Gambling expansion: Maryland's $223 million question

On Monday, Gov.Martin O'Malleybegins a series of make-or-break meetings with local officials and legislative leaders to decide whether he can muster the support necessary to call a special legislative session this month to consider expanding Maryland's nascent gambling program. The governor, who even as recently as a few months ago was publicly expressing his distaste for taking up the issue of gambling again, is pushing hard for a plan that would add a sixth casino inPrince George's Countyand legalize table games throughout the state, among other changes to the law. He is touting it as an economic development opportunity and a boon to the state's treasury, which could see as much as $223 million more a year once the program is fully up and running. But there are a few details local officials and legislators should consider.

The most controversial element of the governor's plan from a political point of view, and the riskiest from a policy standpoint, is the addition of another casino at the National Harbor development in Prince George's County and a corresponding reduction in the taxes paid by casino operators to compensate them for the newfound competition.

Some members of the House of Delegates have objected to the idea of reducing taxes on casino operators at the same time that the state is increasing income taxes on some middle-class Marylanders. The O'Malley administration has complained that this objection seemed to come out of nowhere at the final meeting of a work group on gambling expansion. Indeed, one of the members of that work group, House Ways and Means Committee Chairwoman Sheila Hixson, advanced a bill during this year's regular General Assembly session that would have reduced the tax rate to 60 percent. It is important to note, however, that the bill was never voted on by the full House, and many rank-and-file delegates appear reluctant to lower casino tax rates.

From a policy standpoint, the problem is that the state has only limited information about the market for gambling in the Baltimore-Washington region — just a few weeks of data from Maryland Live at Arundel Mills mall and none from Baltimore. Figuring out the impact of adding another casino to the mix will always be speculative, and doing it now would be doubly so.

But if the benefit to the state is $223 million, at a time when the state still has a $500 million projected budget shortfall, might the risk be worth it? Not necessarily. The additional revenue for the state tied to the addition of a Prince George's site is only a fraction of that total — about $92 million — and it would not be available to the state for at least four years.

A major component of the $223 million estimate comes from making the casinos, not the state, responsible for buying the slot machines. The idea is that the casinos can do so more efficiently, so even if the state shaves a few percentage points off the tax rate in exchange, it still comes out ahead. The Department of Legislative Services (DLS) estimates that would be worth $80 million a year at the state's existing slots sites. Legalizing table games at the existing casinos at a 20 percent tax rate would bring the state $51 million a year. The governor's plan calls for cutting the local governments in for a share of the table games tax revenue if the Prince George's casino is authorized, and that would actually reduce the state's take by $6 million.

The DLS estimates that adding 3,000 slot machines at National Harbor would net the state another $82 million a year, and if the casino operators are responsible for owing the slots, adding the Prince George's site is worth another $16 million. But there's a big caveat. Those figures assume that the Anne Arundel and Baltimore casinos would see their tax rates reduced to 62 percent to compensate them for the increased competition but that the National Harbor site would pay the existing slots tax of 67 percent. MGM has said it is not interested in building a casino if it has to pay that kind of tax rate. It says it would need a reduction to 52 percent, which means the state would either need to settle for much less revenue or risk that this entire exercise is a waste of time.

The upshot is this: The state can add $80 million a year to its bottom line by changing the ownership of the machines, no special session or referendum required. Adding table games — widely considered an eventual inevitability — would bring the total to $131 million a year without any risk of oversaturating the market. Eliminating hours of operation restrictions and bans on free food and drinks at the casinos could add even more. And analysts expect that most of that, about $107 million, would be available in the first year. Why take a gamble on anything else?

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